World’s cheaper oil not a big help to Cayman Islands

International politics, along with business and economic circumstances and newer technology used in the extraction of oil have all combined, as they have in the past, to rattle global energy pricing while generally not affecting the Cayman Islands economy.

Widespread petroleum price changes have had dramatic consequences in the past, especially in countries that rely heavily on imported energy sources. Sometimes such shifts have jolted consumers into deep financial uncertainty, especially when oil costs have shot up quickly.

The big difference today, though, is that instead of raising the cost for each barrel of oil pumped from the ground, the world’s petroleum-producing nations have actually lowered their prices substantially, in part because of a glut of product on the world market.

The spot price of a barrel of Brent crude oil tumbled from US$115 in June 2014 to less than $50 in recent weeks, a more than 55 percent decline in just seven months, records show,

In much of the world, such petroleum products as jet airline fuel, kerosine for heating and electric power-generation and, especially, gasoline for cars have crashed down through price barriers not seen in years.

In Cayman’s big neighbor to the north, the United States, for instance, the oil collapse has meant a financial windfall for drivers of the nation’s more-than-260 million automobiles, saving households an average of more than $550 a year, according to U.S. studies.

Not so in Cayman. Prices at the pump here have fallen less than 20 percent from the previous norm. A recent analysis by the Cayman Compass showed only about a dollar drop in the price of a gallon of gas between October 2014 and late January 2015, when gasoline was selling at $4.60.

Experts in energy economics say the causes of the Cayman Islands’ relative immunity to the drop in fuel costs are as complicated as the causes of the worldwide price decline itself.

One big part is that the U.S. has become the world’s major producer of petroleum, overtaking Saudi Arabia and Russia in 2014 by ratcheting up production, including from new fracking technology and other techniques developed in recent years. But experts say there remain a multitude of reasons for the economic shifts.

What the experts say

Barbara Shook, the Houston, Texas, bureau chief for petroleum information source Energy Intelligence Group, says small markets like the Cayman Islands, with no fossil fuels of their own, no refineries to turn crude oil into usable commodities and scant demand for industrial-strength energy, “live in a big economic disadvantage in the global energy marketplace.”

In part, that’s why the refiners and shippers who ship petroleum products on barges – basically gasoline and diesel fuel – to Grand Cayman and other nearby sites don’t pass on much of their savings on raw oil to customers here. There are too many other fixed expenses that limit what they may save on their purchases of crude oil.

“Consider this,” said Shook, a former Houston Post reporter who covered the petroleum industry. “The Cayman Islands doesn’t have a refinery anywhere nearby. Florida doesn’t have a refinery, either. All of the fuel has to be shipped in and moved by a vessel that has to be leased from whomever, outfitted and operated by somebody.

“The fuel has to be purchased in small enough quantities that it’s kind of a bother for the producer or seller. Then, since we have a glut of fuel supply around the world right now, everyone wants to lease a barge. That raises the price for leasing. The product then has to be handled at a refinery in Texas or Louisiana, transferred onto the barge, specially floated to Cayman. All that adds up,” she says.

For an equivalent shipment of gasoline for cars or diesel (mostly to run the islands’ electric generating plants), Shook explains, a customer in, say, Houston only has to wait for a fleet of trucks to deliver directly from a nearby refinery. The transfer is quick, easy and cheap, unlike such a transfer from a U.S. Gulf-coast refinery to Grand Cayman.

“Then, for retail customers,” Shook says, “there are government taxes, a fixed cost that isn’t affected by the price of crude oil.”

The organization she works for, EIG, gathers data and research news about the international petroleum industry and publishes reports and magazines to keep specialists in the field informed.

Gurcan Gulen, who also lives in the U.S. energy capital of Houston, is a research associate for the Bureau of Economic Geology at the University of Texas, in Austin. He is also an expert on the economics of oil and natural gas value chains. Gulen has a similar take on why Cayman fuel consumers – either at gas pumps or for electricity – don’t get much benefit from lower petroleum prices.

One reason, he says, “is the type of products they use.” These products are mainly from only two categories of refined fossil fuels: gasoline for cars and diesel fuel for a small number of trucks and for electricity generation. Buying this limited range of goods from only a few refineries that ship them in such relatively small quantities imposes penalties on the islands’ negotiating power. Bigger customers get better deals.

Rumor about refineries

There remains a persistent rumor in the Cayman Islands – and among many around the world – that refineries and oil shippers have colluded to hold a portion of the global oil supply aside during these times of low prices, storing it wherever they can, including aboard any excess tanker ships and sea-going barges that get less interest during a slower period of oil demand globally.

“I hear this all the time,” Gulen says. “That the refineries or whatever will hold back part of this product while oil is cheap [so they can] sell it later when the price goes up – and that such practices of limiting supply will drive that price up more quickly.”

Gulen’s position: It’s partially true, partially false. Barbara Shook agrees. Typically, refineries store crude oil on-premise in order to facilitate optimal use of their refining equipment. But they don’t routinely store oil in order to induce a shortage in the market. Their storage capacity isn’t that great.

As for strategically storing an already refined product, like gasoline? No way, Shook says. “Gasoline deteriorates in a matter of weeks. That is why at the end of the growing season, you drain your lawn mower’s tank and discard the gas. It’ll go bad over the winter.”

She said her husband, who is retired, doesn’t drive much, so he only half-fills his car’s tank periodically. No one in the petroleum business would store refined product when it’s worth more at the gas station. Crude oil may deteriorate somewhat, too, Shook says, but at a much slower rate.

Speculators

Certain parties do lock up tankers-full of petroleum hoping to make a killing in the future. “I’ve seen five different federal studies on this issue,” Shook says, “and I believe it’s not being done by legitimate refiners or the shipping industry. But you always do have speculators around if there’s a way to make money. It’s called capitalism: You bet what the market is going to do, one way or another.”

Gulen agrees with Shook on that point. Investors and speculators have been leasing ships and barges during these times of slow oil demand with an eye toward selling it when, inevitably, the price of crude rises, whether that’s in six months or a year and a half.

Both energy economists also agree that speculators’ hoarding of fuel is scarcely hurting the Cayman Islands by keeping the cost of fuel higher than in other markets. The penalty Cayman pays is a result of its being a small out-of-the-way market that must spend much more on moving products to its shores than harvesting its own energy.

How could it do that? Gulen and others believe Cayman and other Caribbean states might do well to develop alternative and sustainable energy sources.

“From an energy security perspective, it’s true for both small and very large fuel-importing states, like India, for instance, to cut back on these more expensive imports and diversify their energy use to include more alternative means of supply, like wind and solar energy,” he says.

Doing so is relatively easier when it comes to replacing the islands‘ diesel-powered electricity generating plants with solar, than providing alternative means to operate cars, trucks and buses, but Gulen is optimistic about that too.

“In a way,” he says, “the Cayman Islands‘ relatively small fleet of automobiles is an advantage. It would take less effort to replace the gas-powered vehicles with electric vehicles than if there were many more on the roads. And since the islands are fairly small, an 80-mile range might be OK for many there.”

Hawaii, Gulen points out, is an island state (though a much bigger one than Cayman) that has had success reducing its dependence on petroleum products while developing solar and wind alternatives.